RealTown Words

A legal document used to secure the performance of an obligation. The term mortgage, which is derived from the French words mort meaning “dead” and gage meaning “pledge,” is appropriate in that the pledge is extinguished only after the debt is paid. In the usual real estate transaction, the buyer seeks to borrow money to pay the seller the difference between the down payment and the purchase price. When the lender (mortgagee) lends the money, the buyer/borrower (mortgagor) is required to sign a promissory note for the amount borrowed and to execute a mortgage to secure the debt.

A valid mortgage requires both a debt and a pledge. The mortgage note creates a personal liability for payment on the part of the mortgagor; the mortgage creates a lien on the mortgaged property as security for the debt. Although the note and the mortgage may appear in the same document, it is customary to have separate instruments. Once the debt is satisfied or becomes unenforceable—for example, when the statute of limitations expires—the mortgage is no longer effective security. The mortgage document is lengthy, containing a number of clauses such as provisions for acceleration, subordination, release schedule, defeasance, and waivers. Also included are covenants to pay taxes, to keep the premises in repair, and to maintain adequate insurance. If the mortgagor fails to pay taxes or insurance premiums, the mortgagee can advance these costs and add the amount to the mortgage debt.
Most mortgages contain an assignment-of-rents clause that allows the lender to collect rents in the event of default if the borrower continues to collect rental income from the property without paying on the note.

In effect, the mortgage provides that the lender can depend on possessing the property if the borrower defaults in paying the note. Although not always the case, the mortgaged property is usually the property that the borrower purchases with the loan proceeds and the mortgage is a purchase money mortgage. Therefore, upon default by the borrower (mortgagor), the lender (mortgagee) can bring foreclosure proceedings to sell the property and retain that part of the proceeds representing the monies still due on the note. If the proceeds of sale are less than the amount owed, in most states the mortgagee would obtain a deficiency judgment against the mortgagor for the difference.

Contract law applies to mortgages: the mortgage must be in writing, name the parties (who must be competent to contract), include a legal description of the mortgaged property, state a consideration, contain a mortgaging clause, state the debt, and be signed by the borrower (mortgagor). In addition, the mortgagor should state his or her marital status; regardless of sex, a spouse should always sign because of his or her homestead rights in the property. The mortgage is usually acknowledged and then recorded, with priority of the lien determined by the date of recordation. The mortgage is recorded because the mortgage creates rights and interest in real property. The mortgage note, however, need not be recorded because it represents only a personal obligation. The number of signatures on the note does not have to conform to the number of persons signing the mortgage.

Some states recognize the mortgagee as the owner of the mortgaged property, subject to defeat upon full payment of the debt or performance of the obligation. Such states recognize the mortgage document as a conveyance of property and are called title theory states. Those states that interpret the mortgage purely as a lien on real property are called lien theory states.

Upon default, under the lien theory, the mortgagee is required to foreclose, offer the property for sale, and apply the funds received from the sale to reduce the debt. As protection to the mortgagor, some state laws give the mortgagor a statutory period within which to redeem after the foreclosure sale. Whether a state follows the title theory or lien theory of mortgages, the security interest of the mortgagee in the land is legally classified as personal property and can only be transferred with the transfer of the debt that the mortgage secures.

When property is sold, the existing mortgages may be assumed, made subject to (unless restricted by a due-on-sale clause) or paid off. When paid in full, the mortgagor should be sure to have the note returned “canceled” and to record a satisfaction of mortgage or release of mortgage as notice that the mortgage is no longer a lien on the property.

Mortgages take on a variety of forms. Some are the adjustable mortgage loan, the graduated payment mortgage, the wraparound mortgage, the shared appreciation mortgage, the flexible loan insurance payment, and the buydown mortgage. These and other types of mortgages—such as blanket mortgages, budget mortgages, open-end mortgages, package mortgages, participation mortgages, and purchase-money mortgages—are discussed under their respective headings.